Hours before Zomato’s listing, valuation guru Prof Aswath Damodaran derived a value of ₹40 per share — much below the price of ₹76 at which the shares were offered to the public.

Stock market guru Rakesh Jhunjhunwala wished Zomato luck but stated that he would not invest in the company. The views of ordinary investors on social media bordered between two extremes — some trashed the company while others stated that this is a watershed moment for start-ups in India. The ones who were pessimistic about Zomato were thinking of existing competition from Swiggy and potential competition from Amazon. The ones who were optimistic about Zomato were of the opinion that if Zomato could survive this long with competition, it would continue to survive in the future too.

Zomato silenced all discussions by listing in a stellar fashion — starting off in excess of 55 per cent of its offer, breaking the upper circuit and settling down at around a 50 per cent premium to its offer price. Prof Damodaran did mention in his valuation report that he could be terribly wrong about the ₹40 valuation.

Valuing Zomato

Valuing Zomato purely on the basis of its financials would yield strange results. For FY20, the company posted a total revenue of ₹2,742.43 crore. Losses were almost the same at ₹2,385.60 crore. The company spends a lot of money on outsourced support cost, salaries, share-based payments and advertisement and sales promotion.

Unsurprisingly, the main assets of Zomato are not tangible assets such as buildings, plant and machinery but intangible assets such as software, website, trademarks, brand, customer contracts and relationships, technology platform, content, restaurants listing platform and non-compete agreements. Looking forward, the direction of the financials would not change too much from what we have seen till now.

In valuation parlance it is often said that price is what you pay, value is what you get. Zomato proves this. The listing of Zomato was an event that was marked by sentiment — a home-grown start-up taking the bold step of listing in India despite not having a strong set of financials. International bourses such as Nasdaq would welcome such listings. Not many were sure how the Indian bourses would respond to a company that thrives on its intangible assets.

Values cannot be ascribed to sentiments while projecting cash flows using the discounted cash flow technique. The premium that Zomato is trading at can be attributed to this sentiment – it may not last.

The oversubscription of the issue can be attributed to a bit of sentiment and the possibility of listing gains. The prospectus of Zomato ran into 419 pages with more than 30 pages detailing risk factors. An investor taking the the trouble of reading all the 419 pages would have been left confused and may have passed investing in the issue. SEBI should do something about reducing the amount of information that is being dished out in prospectuses.

The Paytm issue has been lined up for listing. Paytm appears to beat Zomato on all aspects. Its draft prospectus runs to 497 pages, it has revenues of ₹3,186 crore and reported net loss of ₹1,698.30 crore in FY21. Any takers for an offer price between ₹90-100 per share and a listing price of ₹150 per share? Like Prof Damodaran, this could be way off the mark too.

The writer is a chartered accountant

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